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Forward Premia and Risk Premia in a Simple Model of Exchange Rate Determination

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  • Boyer, Russell S
  • Adams, F Charles

Abstract

This paper develops the standard rational expectations model of exchange rate determination with risk premia taken as exogenous. The exchange rate is equal to a weighted sum of all future values of the fundamentals and risk premia. Specifically, if risk premia are percei ved to be temporary, then their levels are negatively associated with rates of appreciation. This finding is consistent in sign with the results from the conventional regression equation, but the theory indicates that to obtain unbiased estimates, errors-in-variables techniques must be employed. Plausible estimates for the money market parameters are found from Canadian data. Copyright 1988 by Ohio State University Press.

Suggested Citation

  • Boyer, Russell S & Adams, F Charles, 1988. "Forward Premia and Risk Premia in a Simple Model of Exchange Rate Determination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 633-644, November.
    • Handle: RePEc:mcb:jmoncb:v:20:y:1988:i:4:p:633-44
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    Cited by:

    1. Peter Rowland, 2003. "Uncovered Interest Parity and the USD/COP Echange Rate," Borradores de Economia 227, Banco de la Republica de Colombia.
    2. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
    3. John Pippenger, 1991. "Forward rates as predictors of future spot rates in small open economies: The case of Kuwait," Open Economies Review, Springer, vol. 2(2), pages 183-201, June.
    4. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    5. Aziz Chouikh & Abdelwahed Trabelsi, 2014. "Modeling Risk Premia in Forward Foreign Exchange Rates as Unobserved Components: The Model Identification Problem," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(3), pages 119-135, July.
    6. Isaac, Alan G., 1998. "Risk premia and overshooting," Economics Letters, Elsevier, vol. 61(3), pages 359-364, December.
    7. Alex Luiz Ferreira, 2004. "Leaning Against the Parity," Studies in Economics 0413, School of Economics, University of Kent.
    8. Min-Yong Shin & Taehwan Yoo, 2006. "Monetary Policy Rules and the Forward Discount Bias," Korean Economic Review, Korean Economic Association, vol. 22, pages 299-317.

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